Optimal incremental pricing methodology for valuing demand management incentives

Demand management programs are an important option in avoiding capital intensive expenditure in distribution networks and keeping costs to consumers low. Current pricing mechanisms for demand management incentives to customers are sub-optimal, as they don't ensure that the true customer type / incentive appetite is discovered. This paper uses game theory and mechanism design to develop a demand management mechanism that is incentive-compatible and involves a steadily increasing price to “search” customer type. This mechanism is then shown to be compatible with an optimal incremental pricing methodology, based on a trained customer uptake model, which provides the lowest possible demand management program total cost.